Europe is rethinking its rules on government debt to meet new global challenges

A reform of the fiscal rules that govern public spending, debt and investment in EU countries is currently being prepared by the European Commission. Real Economy asks what does this mean for the future of government spending in the EU, in particular when it comes to investment to combat climate change?

The Dutch finance minister Sigrid Kaag and Spanish finance minister Nadia Calviño are calling for a reform that would enable the public investments needed to implement the green and digital transitions.

The two finance ministers presented their joint statement on Monday 4 April on the margins of a meeting of all eurozone finance ministers in Luxembourg.

The current fiscal rules go back to the Maastricht treaty and the beginning of the Eurozone in 1992 and govern how countries manage their public finances. At their core: annual fiscal deficit must be capped at 3% of Gross Domestic Product and overall government debt no more than 60%

During the pandemic, they were put on hold temporarily so that governments could spend more, but they are due to return in 2023.

However with increased public debt, the need for government investment to help Europe go green and digital, and now Russia’s war in Ukraine - what does that mean for the future of the fiscal rules?

The European Commission has published a review of its economic governance framework, along with a consultation - with trade unions, academics, central banks, national parliaments and EU finance ministers. It is due to make recommendations later in 2022.

The joint paper by the Dutch and Spanish finance ministers calls for country-specific fiscal plans and for the introduction of a simple expenditure rule.

How to prioritise green investment?

The review is looking at how to ensure that